<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
-----------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________ to _________________
Commission file number 0-23779
-----------------
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 98-0149351
- -------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
C/O TES GMBH, 25 IMPLER STRASSE, 81371, MUNICH, GERMANY
- -------------------------------------------------------------------------------
(Address of principal executive office)
011 49 89 720 15 100
- -------------------------------------------------------------------------------
(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of the issuer's Common Stock:
CLASS OUTSTANDING AT SEPTEMBER 30, 1999
----- ---------------------------------
Common Stock, no par value 16,692,804
<PAGE>
Technical Environment Solutions, Inc.
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Balance Sheet at September 30, 1999 ......... 3
b. Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1999 and 1998 ............................ 4
c. Consolidated Statements of Cash Flow
for the three months and nine months ended
September 30, 1999 and 1998 ............................ 5
d. Notes to Unaudited Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 11
Item 2. Changes in Securities .................................... 11
Item 3. Defaults Upon Senior Securities .......................... 11
Item 4. Submission of Matters to a Vote of Security Holders ...... 11
Item 5. Other Information ........................................ 11
Item 6. Exhibits and Reports on Form 8-K ......................... 11
SIGNATURES ............................................................... 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Technical Environment Solutions, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, September 30,
1999 1999
(Unaudited) (Unaudited)
ASSETS
DM US $
<S> <C> <C>
Current assets:
Cash and cash equivalents 496,405 270,329
Accounts receivable, trade 63,468 34,564
Accounts receivable -related party 0 0
Note receivable - current portion 10,000 5,446
Inventory 60,000 32,674
Prepaid expenses 113,064 61,572
----------- -----------
Total current assets 742,937 404,585
Property and equipment, at cost, net of
accumulated depreciation of DM 87,762 657,786 358,213
Investments 10,000 5,446
Note receivable - non-current 40,000 21,783
Intangible assets, net of amortization of $357,500 997,500 543,212
Other assets 561,296 305,667
----------- -----------
3,009,519 1,638,905
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - others 100,000 54,458
Accounts payable 632,156 344,254
Accounts payable - related party 15,862 8,638
Accrued expenses - related party 28,425 15,479
Accrued expenses 752,812 409,961
----------- -----------
Total current liabilities 1,529,255 832,791
Loans from shareholders 430,900 234,657
Stockholders' equity:
Common stock, no par value,
20,000,000 shares authorized,
16,692,804 shares issued and outstanding 7,696,090 4,191,085
Accumulated deficit (6,646,726) (3,619,630)
----------- -----------
1,049,364 571,456
----------- -----------
3,009,519 1,638,904
----------- -----------
</TABLE>
3
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1999 1998 1999 1999
DM DM DM DM US $
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales 266,455 360,488 631,527 850,872 463,362
Cost of operations 80,203 458,842 179,675 732,898 399,117
---------- ---------- ---------- ---------- ----------
Gross Profit 186,252 (98,354) 451,852 117,974 64,245
Other costs and expenses:
General and administrative (Loss)
from operations 729,355 1,407,441 1,907,511 2,582,681 1,406,459
---------- ---------- ---------- ---------- ----------
(543,103) (1,505,795) (1,455,659) (2,464,707) (1,342,214)
Other income and (expense):
Interest income 7,681 40,870 10,163 40,870 22,257
Losses of unconsolidated subsidiary (40,974) 0 (49,000) 0 0
Interest expense (11,041) (46,319) (14,759) (72,616) (39,545)
---------- ---------- ---------- ---------- ----------
(44,334) (5,449) (53,596) (31,746) (17,288)
(Loss) before income taxes (587,437) (1,511,244) (1,509,255) (2,496,453) (1,359,502)
Provision for income taxes 95 (1,347) 1,716 2,292 1,248
---------- ---------- ---------- ---------- ----------
Net (loss) (587,532) (1,512,591) (1,510,971) (2,498,745) (1,360,750)
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Net income (loss) (0.04) (0.09) (0.10) (0.15) (0.08)
Weighted average shares outstanding 15,481,104 16,692,804 14,752,657 16,497,465 16,497,465
---------- ---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1998 1999 1999
DM DM US $
------------- ------------- ------------
<S> <C> <C> <C>
Net (loss) (1,510,971) (2,498,745) (1,360,750)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation 50,263 126,312 68,786
Amortization 101,750 125,626 68,413
Interest added to loan balance (7,500) 0 0
Losses of unconsolidated subsidiary 49,000 0 0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 236,963 42,123 22,939
(Increase) decrease in inventory 0 60,000 32,674
(Increase) decrease in prepaid expenses 23,953 (34,908) (19,010)
(Increase) decrease in other assets (89,383) (261,296) (142,295)
Increase (decrease) in accounts payable and
accrued expenses (234,072) 652,789 355,491
----------- ----------- -----------
Total adjustments 130,974 710,646 386,999
----------- ----------- -----------
Net cash (used in) operating activities (1,379,997) (1,788,099) (973,751)
----------- ----------- -----------
Cash flows from investing activities:
Investment in unconsolidated subsidiary (49,000) 0 0
Purchase of fixed assets (262,286) (77,014) (41,940)
----------- ----------- -----------
Net cash provided by (used in) investing activities (311,286) (77,014) (41,940)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 2,589,854 1,835,109 999,351
Advances from shareholder 0 (24,100) (13,124)
Repayment of stockholder loans (241,645) 0 0
Repayment of notes payable - bank (197,798) (29,541) (16,087)
Proceeds from notes payable - other 0 100,000 0
----------- ----------- -----------
Repayment of notes payable - other (340,763) (80,000) (43,566)
----------- ----------- -----------
Net cash provided by financing activities 1,809,648 1,801,468 926,574
----------- ----------- -----------
Increase (decrease) in cash 118,365 (63,645) (89,117)
Cash and cash equivalents, beginning of period (937,787) 560,050 304,988
----------- ----------- -----------
Cash and cash equivalents, end of period 1,056,152 496,405 215,872
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Technical Environment Solutions, Inc.
Notes to Unaudited Financial Statements
September 30, 1999
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions incorporated in Regulation SB
of the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and
accruals) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. The
accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB that are not historical or
current facts are "forward-looking statements" made pursuant to the safe
harbor provisions of Section 27A of the Securities Act of 1933 (the "Act")
and Section 21E of the Securities Exchange Act of 1934. These statements
often can be identified by the use of terms such as "may," "will," "expect,"
"believe," "anticipate," "estimate," "approximate" or "continue," or the
negative thereof. The Company intends that such forward-looking statements be
subject to the safe harbors for such statements. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Any forward-looking
statements represent management's best judgment as to what may occur in the
future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company that
could cause actual results and events to differ materially from historical
results of operations and events and those presently anticipated or
projected. These factors include adverse economic conditions, entry of new
and stronger competitors, inadequate capital, unexpected costs, failure to
successfully penetrate the Company's markets both in Germany and in foreign
countries, and failure to capitalize upon access to new markets. The Company
disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such
statement or to reflect the occurrence of anticipated or unanticipated events.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
The following information should be read in conjunction with the
financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
GENERAL
Technical Environment Solutions, Inc. ("TES") was incorporated under
the laws of Colorado in June 1994. It is a non-operating holding company.
TES' operations are conducted entirely in Germany. It has two wholly-owned
subsidiaries that have been established under the laws of Germany, and one
wholly-owned subsidiary established under the laws of Colorado. Operations
are conducted through these subsidiaries: namely, Technical Environment
Solutions GmbH ("TES GmbH"), TES Oecon AG ("Oecon"), and Environmental
Technologies and Software Solutions, Inc. ("ENTECS"). Unless the context
otherwise requires, references to the Company include its subsidiaries.
Since 1994, TES has been engaged in the marketing of recycling
services on a contract basis primarily for electronic scrap and other
valuable waste materials in cooperation with specialist waste disposal
companies. The recycling activities are conducted principally within the TES
GmbH subsidiary. Management intends to significantly expand this operation in
the future. Management also intends to develop a job training school, the
Oecon Institute, to provide training and education for positions in the
recycling industry. Management intends to focus TES' job training programs
upon providing job education and training for the long-term unemployed and
disadvantaged. The training programs are conducted within the TES Oecon AG
subsidiary.
ENTECS is a non-operating holding company, which conducts operations
entirely in Germany through two wholly owned German subsidiaries - ENTECS
Umwelttechnik GmbH and ENTECS Software und Umweltmanagement GmbH. ENTECS is
active in the recycling of various waste products within the environmental
protection industry, which is expected to grow rapidly due to increasing
investments being made to comply with environmental regulation by both
private enterprises and public institutions. The environmental protection
industry is also expected to continually create new jobs because of the
dynamic growth in the area. Further, ENTECS holds the exclusive licensing
rights to a new recycling system for the capture and re-use of cement waste
and waste water that is generated by concrete mixing plants. The system,
known as the "BRS-Compact," is in the process of being patented both as a
technology and as a process. Management is currently re-evaluating the cement
recycling business in order to determine the Company's strategic direction
with respect to cement recycling. ENTECS' subsidiary, ENTECS Umwelttechnik
GmbH, owns an artificial peat production system, which produces three grades
of high-quality all-natural artificial peat products.
In June 1999, the Company entered into an Agreement and Plan of
Merger with Environmental Technologies and Software Solutions, Inc.
("ENTECS"), which provided that TES Acquisition Corp., a subsidiary of the
Company would be merged into ENTECS, subject to the approval of the ENTECS
stockholders. Under the Agreement and Plan of Merger which was approved by
the ENTECS shareholders at a Special Meeting on July 30, 1999, the
shareholders of ENTECS received seven shares of the Company in exchange for
each share of ENTECS that they held. The merger was effective in August 1999.
The previous amounts owed by the Company to ENTECS have been eliminated in
consolidation since ENTECS is now a wholly-owned subsidiary of TES.
7
<PAGE>
The Company continues to use cash and operate at a loss (See
"Liquidity and Capital Resources").
Basic loss per share was computed using the weighted average number
of common shares outstanding and has been adjusted to reflect the merger
described above.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Sales for the nine month period ended September 30, 1999 were DM
850,872 a decrease of DM 219,345, or 34.73%, as compared to the nine month
period ended September 30, 1998. The principal reasons for this decrease in
sales were as follows:
- - TES GmbH ceased its former operations, which are now concentrated in TES
Oecon AG. All recycling activities, including certified dismantling,
repair services, marketing of valuable products and components, are now
conducted by TES Oecon AG.
- - TES Oecon AG is still in the process of building the market for its
services and products.
- - The average contract price for recycling activities has decreased.
Cost of operations for the nine month period ended September 30,
1999 was DM 732,898, a decrease of DM 553,223, or 307.90%, as compared to the
nine month period ended September 30, 1998. This decrease was due to
decreased costs of operations and the decline in sales.
As a result of the changes noted above, gross profit for the nine
month period ended September 30, 1999, was DM 117,974, an decrease of DM
333,878, or 73.89%, as compared to the nine month period ended September 30,
1998.
General and administrative expenses for the nine month period ended
September 30, 1999, were DM 2,582,681, an increase of DM 675,170, or 35.40%,
as compared to the nine month period ended September 30, 1998. This increase
was principally due to the following:
- - Increased payroll and payroll related expenses for employees in the
Landsberg facility;
- - A reduction in the state subsidies which the Company receives for each
new position created in the recycling component of the Company's
business. These subsidies are treated as an offset to general and
administrative expenses. The subsidies which the Company receives from
the state end after each new employee's first complete year of
employment. Thereafter, the Company must bear the full cost of such
employees' salary and benefits;
- - Rent for additional storage ground at the Landsberg facility due to the
increased operating activity;
- - Increased payroll and payroll related costs of sales personnel; and
- - Legal and accounting expenses related to the merger of the Company with
ENTECS.
As a result of these factors, the operating loss for the nine month
period ended September 30, 1999, was DM 2,464,707, an increase in the
operating loss of DM 1,009,048, or 69.32%, as compared to the nine-month
period ended September 30, 1998. Other income and expenses for the nine month
period ended September 30, 1999, involved an expense of DM 31,746, an
increase of DM 49,000 or 40.77%, as compared to the nine month period ended
September 30, 1998. The increase in other expenses was primarily due to the
fact that the Company had written off its investment in an unconsolidated
subsidiary in 1998 and, as a result, had no such loss recorded in the nine
months ended September 30, 1999, and as a result of higher interest expense
resulting
8
<PAGE>
from an increase in the Company's borrowings. For the reasons noted above,
the net loss for the nine month period ended September 30, 1999, was DM
2,498,745, an increase in the net loss of DM 987,774, or 65.37%, as compared
to the nine-month period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently experiencing a severe liquidity crisis and
must raise additional capital. Further, the Company has not generated
sufficient cash flow to fund its operations and activities. Historically, the
Company has relied upon internally generated funds, funds from the sale of
shares of stock and loans from its principal shareholder and his wife to
finance its operations and growth. Management intends to raise additional
capital through further public or private offerings of its stock and through
bank loans or loans from private investors, although there can be no
assurance that the Company will be able to obtain such financing. The
Company's future success and viability are entirely dependent upon the
Company's ability to raise additional capital. Management is optimistic that
the Company will be successful in its capital raising efforts; however, there
can be no assurance that the Company will be successful in raising additional
capital. The failure to raise additional capital will have a material and
adverse affect upon the Company and its shareholders.
At September 30, 1999 the Company had negative working capital of
(786,318 DM) and cash and cash equivalents of 496,405 DM. Further, the
Company's net deficit had increased to 6,646,726 DM at September 30, 1999.
Management has taken certain steps to reduce its overhead, including
reducing the number of its employees, and is considering other cost cutting
measures.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") computer problem refers to the potential for
system and processing failures of date-related data as a result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date represented as "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
ENTECS has the exclusive distribution rights to Fabius, which is a
software product designed to assist companies with environmental compliance.
The Company has been advised by the developer of Fabius that it is Y2K
compliant. In addition, the Company has tested Fabius for Y2K compliance, and
based upon the results of those tests, management believes that Fabius is Y2K
compliant. However, TES' testing of Fabius does not cover every possible
computing environment. Accordingly, some customers may have Y2K problems with
products that the Company believes are Y2K compliant. For instance, users of
Fabius may be operating on older versions of hardware platforms than the
hardware platforms tested.
The Company also may be affected by Y2K issues related to
non-compliant internal systems developed by TES or by third-party vendors.
The Company has reviewed its internal systems, including its accounting
system, and has found them to be Y2K compliant. The Company is not currently
aware of any Y2K problem relating to any of its internal, material systems
and management does not believe that it has any material systems that contain
embedded chips that are not Y2K compliant.
The Company's internal operations and business are also dependent
upon the computer-controlled systems of third parties such as suppliers,
customers and service providers.
9
<PAGE>
Management believes that absent a systemic failure outside the control of the
Company, such as a prolonged loss of electrical or telephone service, Y2K
problems at such third parties will not have a material impact on the
Company. The Company has no contingency plan for systemic failures such as
loss of electrical or telephone services. The Company's contingency plan in
the event of a non-systemic failure is to establish relationships with
alternative suppliers or vendors to replace failed suppliers or vendors.
Other than the previously described testing, and remedying problems
identified by testing or from external sources, the Company has no other
contingency plans or intention to create other contingency plans.
Any failure by the Company or its licensor to make Fabius Y2K
compliant could result in a decrease in sales of Fabius, an increase in
allocation of resources to address Y2K problems of its customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by Fabius' customers
due to such year 2000 problems. Failures of TES' internal systems could
temporarily prevent it from processing orders and issuing invoices, and could
require it to devote significant resources to correcting such problems. But
to management's knowledge, the internal accounting systems have been attested
by the supplier as Y2K compliant. Due to the general uncertainty inherent in
the year 2000 computer problem, resulting from the uncertainty of the year
2000 readiness of third-party suppliers and vendors, the Company is unable to
determine at this time whether the consequences of Y2K failures will have a
material impact on its business, results of operations, and financial
condition.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
With the exception of the common stock issued to the ENTECS
shareholders in connection with the acquisition of ENTECS, the Company has
not issued any other securities required to be disclosed in this report. The
shares of the Company's Common Stock issued to the former ENTECS shareholders
were registered with the United States Securities and Exchange Commission
under the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: No exhibits are filed with this Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999.
b) Reports on Form 8-K: In connection with the acquisition of ENTECS, the
Company filed two Form 8-K's during the quarter ended September 30,
1999.
<TABLE>
<CAPTION>
Date Filed Item Number(s)
<S> <C>
August 23, 1999 Item 2 and Item 7
September 27, 1999 Item 2 and Item 7
</TABLE>
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: NOVEMBER 18, 1999
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
/s/ Gerd Behrens
-------------------------------------
Gerd Behrens
President and director
(Principal Executive Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-QSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 270,329
<SECURITIES> 0
<RECEIVABLES> 40,010
<ALLOWANCES> 0
<INVENTORY> 32,674
<CURRENT-ASSETS> 404,585
<PP&E> 406,006
<DEPRECIATION> 47,793
<TOTAL-ASSETS> 1,638,905
<CURRENT-LIABILITIES> 832,791
<BONDS> 234,657
0
0
<COMMON> 4,191,085
<OTHER-SE> (3,619,630)
<TOTAL-LIABILITY-AND-EQUITY> 1,638,905
<SALES> 463,362
<TOTAL-REVENUES> 463,362
<CGS> 0
<TOTAL-COSTS> 399,117
<OTHER-EXPENSES> 1,406,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,288)
<INCOME-PRETAX> (1,359,502)
<INCOME-TAX> 1,248
<INCOME-CONTINUING> (1,360,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,360,750)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
